Executive compensation is not the main focus now. However, consider current and future performance within our new environment to retain high-performing executive teams
As the impact of COVID-19 expands, organizations struggle with business continuity and human resource challenges. Day-to-day activities and business planning have become less critical during this time of increasing uncertainty.
Concerning executive compensation administration, we advise clients to maintain as much discipline as possible. Ask yourself whether you can continue to defend compensation decisions as reasonable, and not violate IRS standards. Remember, decisions related to compensation changes under this very stressful and uncertain time could set a precedent for future reactions.
To assist you during this difficult time, we at Gallagher’s HR and Compensation Consulting practice are sharing COVID-19 related compensation questions and our responses. Use us as your sounding board to evaluate any executive compensation changes you are considering. We can help to support your overall organizational wellbeing so your business can face the future with confidence.
How should we be thinking about executive compensation governance and Compensation Committee relationships?
- Develop clear and simple dashboards for regular sharing and review with the Compensation Committee on the organization’s performance across incentive plan goals.
- Increase the frequency of communication between management, board and committee(s) chairperson. Build a culture of communication and feedback.
- Discuss various scenarios and how the Compensation Committee would handle such issues under a flexible approach to compensation supported by the governance structure.
What are you seeing related to base salary adjustments?
- We are hearing from many clients and seeing in the headlines that executives are implementing or considering executive salary reductions. Most of the pay cuts have ranged from 50% to 10%.
- Discuss whether such salary reductions are permanent or temporary, and how they impact compensation positioning across all components of pay and plan administration.
- Expected executive salary increases for 2020 prior to the COVID-19 outbreak were reported at 3% on average. Most organization are continuing to use the projected 3% as of now.
- If organizations implement executive salary reductions, we expect that modest increases may occur for executives that fall below a targeted base salary positioning as informed by an organization’s executive compensation philosophy.
- For executives compensated at or above targeted base salary levels, we expect to see lower salary increases and some salary freezes in 2020 and 2021 across the healthcare industry.
Organizations that received federal loan assistance under the CARES Act will see higher prevalence of salary freezes and reductions to meet the loan requirements
- Headcount reductions or hiring freezes may require existing executive leadership team members to “wear even more hats,” and their market benchmark may require examination if additional duties become permanent. An expanded breadth of responsibility may also impact base salary and base salary range positioning.
What should we do about our annual incentive program?
- Review your annual incentive plan documents immediately and identify areas of needed improvement or clarification.
- Plan document language and interpretation will play a major role over the next few years as we navigate the “new normal.”
- Discuss positioning of such other areas of compensation as base salary and benefits, and what happens to total compensation positioning if the company pays no incentives. Does this increase the risk of unwanted executive turnover?
- Consider discussing now with your Compensation Committee how the organization may react if faced with further issues from COVID-19.
- Establish a dashboard to track and report progress toward incentive plan goals.
- We expect that management and Compensation Committees will discuss the role of discretion in addressing executive compensation decisions.
- Ensure that incentive compensation plan documents and arrangements include the appropriate language considering the use of discretion in finalizing payouts, altering performance metrics, and changing or eliminating incentive opportunities.
- Discuss how pandemic may impact incentive plan financial and/or quality triggers and how the organization might react.
What should we do with our long-term incentive?
- We reiterate our guidance related to the annual incentive program. Review plan documents immediately and identify areas of needed improvement or clarification.
- Plan document language and interpretation will play a major role over the next few years as we all navigate the “new normal.”
- Long-term incentive goals are inherently difficult for healthcare organizations. Uncertainty will stress management even more.
- Focus on the long-term strategy and how actions related to COVID-19 will impact timelines.
- Focus on what will be required on the journey to future financial viability, improved patient access, and improved quality of care. Percentile rankings in future cycles may look very different than recent cycles. Understand the process and focus on rewarding improved performance.
- Identify how and when to adjust performance measures. Consider a check-in half way through the long-term performance cycle and discuss the process of how the Compensation Committee is informed of any needed adjustments.
- This may be an opportunity to increase the long-term incentive eligibly under your current plan in order to increase the retentive value of your overall compensation program. Take advantage of your current plan and look at the eligibility. You may discover more people who are considered crucial to long-term success.
What should we consider related to our executive benefits?
- Review your plan documents and make sure you understand what the benefit plans allow and provide. Connect with carriers and brokers for further clarification where needed.
- We expect that some organizations will make adjustments or even suspend deferred compensation/supplemental executive retirement plan contributions or accruals.
- Review the plan document to confirm if the plan allows for discretion in whether the organization contributes or not.
- Consider how the plan impacts the individual executive. Various generations in the leadership workforce bring differing perceptions and personal financial impact. Understand whether and how the organization would make adjustments, keeping in mind last that minute retirement contributions could push total compensation to unreasonable levels or cause additional excise taxes.
- Evaluate deferred compensation/ retirement plan structures and funding, and determine if alternative funding mechanisms may be useful either as a retention strategy or alternative vehicle to deliver compensation.
- Understand how compensation reductions impact life insurance coverage and ensure plan document and carriers allow for the adjustment and the impact to coverage.
What are you seeing related to executive perquisites?
- We expect to see a reduction in perquisites offered to executives.
- Consider how the value could be moved into other areas of the total compensation package: adjustments to base salary, incentive opportunities at target or stretch goals, or deferred compensation.
- Examine how the executive team uses and perceives perquisites to determine opportunities for expense reductions.
We are worried about our executive team and the long hours they are putting in. How do we ensure retention through this downturn?
- Assess the short- and long-term retentive value of the compensation program.
- Examine where compensation may not be competitive for particular individuals.
- Develop a strategy that focuses on the desired level of retention, but allows for needed or necessary natural turnover.
- We expect hiring delays even when an organization identifies a need. Recognize that the recruiting and hiring process is much more costly now. Retaining a high performing team is even more critical.
- Anytime healthcare providers achieve a major transformation, the executive team becomes highly marketable and turnover increases.
Should we look at severance agreements?
- Yes. Look at severance agreements and understand the true potential cost of headcount reductions.
- Understand the value of offering an executive protection from being severed.
- Closely review compensation arrangements and understand the definition of “termination” and “for good cause.”
- Identify all executives who are covered by contracts or severance arrangements.
- Consider whether severance agreements provide the appropriate and intended levels of protection. This tool can increase the retentive value of the compensation program without immediate costs.
How can we strengthen our succession planning?
- Review your executive team succession plan and ensure that the “emergency team” is clearly identified.
- Formalize your succession plan process and report this to the board or compensation committee.
- Build the lines of communication between executives and identified potential successors. Communicate the plan and the process to these individuals.
- Succession plans serve as strong retention vehicles if managed properly.
We at Gallagher are happy to discuss any questions to help you support the overall wellbeing of your organization.
Call 800.821.8481 for more information.
© Arthur J. Gallagher & Co.
This information is based on Gallagher’s interpretation of the status of current laws and guidance. However, the communication is not legal advice. Any organization that makes decisions on the issues set out in this communication needs to do so under the advice of its own legal counsel.
Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.